Friday 27 April 2012 17.10 EDT
First published on Friday 27 April 2012 17.10 EDT

It has become a ritual: every six months, I debate the IMF at their annual meetings, the last two times represented by their deputy director for Europe. It takes place in the same room of that giant greenhouse-looking World Bank building on 19th Street in Washington, DC. And each time, the IMF's defense of its policies in the eurozone does not get any stronger.

Maybe, it's because most economists at the IMF don't really believe in what they are doing. The fund is, after all, the subordinate partner of the so-called "troika" – with the European Commission and the European Central Bank (ECB) – calling the shots. And most fund economists know their basic national income accounting: fiscal tightening is going to make these economies worse, as it has been doing. Those that have tightened their budgets the most – for example, Greece and Ireland – have shrunk the most, as would be predicted.

In the Netherlands, which is also in recession, the government fell this week after failing to get its austerity package through parliament. The irony of this happening to one of the most pro-austerity governments in Europe was not lost on the continent.

In France, parties described by much of the media as "extremes of the left and right" captured a record 30% of the vote. In reality, the Left Front candidate, Jean-Luc Mélenchon was not extreme by any rational measure. On the contrary, he won 11% of the vote because he opposed the extremism of the "mainstream", which pledges to plunge France into recession and vastly increase unemployment by attempting to balance its budget in the next few years. Mostly likely, he could have won much more, if not for the fear among left-of-center voters of giving incumbent Nicolas Sarkozy a boost by winning the first round.

As for the far-right National Front's record showing of 19%, they are, indeed, extreme in their hostility to immigrants. However appalling their strength, though, one should not assume that this was the main issue in the minds of all of their voters. One poll of their voters showed 78% wanted a return to the French franc. The party's candidate, Marine Le Pen, also campaigned against the euro and against European integration.

This is another irony that many liberals and even much of the left do not wish to acknowledge: by implementing a monetary union that is based on neoliberal principles and rules, the eurozone may have undermined European solidarity and even the potential for further integration. The current structure and leadership of the eurozone seeks to adjust the imbalances brought on by the run-up to the world financial crisis and the 2009 recession by putting the burden of adjustment on those who can least afford it.

This has huge social costs. It is also attempting to accomplish something that is painful and probably not possible – an "internal devaluation" in Spain, Portugal, Greece, Ireland and Italy; and "growth through austerity" in France. One result is not only the backlash against immigrants, which is often an ugly side-effect of recessions and prolonged unemployment, especially when politicians fan the flames, but also a greater friction between countries than we have seen for some time in Europe.

On the economic front, Europe faces two immediate problems. The first is the possibility of an acute financial meltdown, of the type that followed the collapse of Lehman Brothers in 2008. The ECB under Mario Draghi, who took over in November 2011, has seemed to want to avoid the near-death experiences of last year. By pumping more than 1tn euros into the banking system since December, the ECB has reduced the probability of an acute banking crisis.

The second crisis is the recession itself. And as the recession drags on, and the European economy worsens, the possibility of a more severe financial crisis increases. Draghi was unusually pessimistic this week: he noted that the eurozone was "probably in the most difficult phases" of a process in which fiscal austerity was "starting to reverberate its contractionary effects".

From Draghi's remarks this week, it seems that he, too, may not believe in what the European authorities are doing. But the European Central Bank is not willing to do what would end the crisis most immediately. The ECB has the ability to buy the bonds of troubled eurozone countries, and can create the money to do so – just as, in the US, the Fed has created some $2.3tn since 2008 and used it to buy long-term US treasury obligations.

The ECB could thereby put an end to the threat of an acute crisis in Europe, and remove countries like Spain from the self-defeating cycle of cutting spending and shrinking their economies in a futile attempt to lower their debt burden. (Indeed, the credit-rating agency S&P just lowered Spain's bond rating, and it appears that it did so because of the damage that it expects Spain's economy to suffer from the budget cuts that are, ironically, supposedly intended to mollify the bond markets.)

The ECB could put a ceiling on the interest rates of Italian and Spanish bonds (the countries whose debt is too-big-to-fail) by simply committing to buy these bonds whenever yields are above, say, 2.5%. By doing this, they would cut off the possibility of these countries' interest burdens spiraling to unsustainable levels, and ending up like Greece's.

Of course, the European authorities would also have to change direction and support counter-cyclical policies in the countries that are already under IMF agreements – Greece, Portugal and Ireland – as well as the rest of Europe. But all of this is quite feasible – with the co-operation of the ECB.

There are some who say that the ECB doesn't have the legal authority to do this, but there are few legal restrictions on them. As Draghi noted last year, maintaining "price stability" includes intervening against the threat of deflation, as well as inflation. That is enough of a rationale to resolve Europe's financial crisis through the obvious means available.

It is only the political will that is lacking. In the meantime, the opposition of ordinary Europeans throughout the eurozone will be all that stands between the European authorities and a worsening economic mess.